Employment and Workplace Relations update: Are they an employee or independent contractor? High Court says it’s all about the terms of the engagement contract

Employers have long wanted a clear contractual avenue to classify the status of an independent contractor as opposed to an employee.

On 9 February 2022, the High Court delivered two decisions providing some clarity to employers as to defining an employee based on their work practices, which ultimately will make it easier for employers to protect themselves. Both decisions are expected to have ongoing positive effects for business, particularly those that are savvy with their contract drafting.

Background to the defining decisions

Until recently, defining a worker as an independent contractor in a contract was not as straight forward as the wording of the contract itself.

Workers had wide scope to argue that, despite what was in a contract, they should have been classified as an employee because of the way they conduct their work for the employer.

Or, as explained in our update on the recent WorkPac Pty Ltd v Rossato [2021] HCA 23, the employer may argue that an employee is a casual employee despite the circumstances of how they conducted their employment, or, the ‘totality of the relationship’.

For many decades, Courts would determine this question by using the ‘multifactorial approach’ where the Courts consider the terms of the engagement contract along with the work practices to determine the nature of the engagement.

In two decisions handed down recently on 9 February 2022, the High Court appear to have fundamentally changed this approach.

The High Court now says that where parties have a written contract that comprehensively states the terms of their relationship, then whether their relationship is one of employment or otherwise is determined only by reference to the rights and obligations of the parties under that contract. However, there is a proviso that the contract cannot be one that is challenged for being a sham or otherwise varied by conduct or ineffective under general law or statute.

The first case: Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1

A 22-year-old British backpacker (Mr McCourt) with limited work experience travelled to Australia on a working holiday visa. Construct (a labour hire company) offered him a role that described him as a ‘self-employed contractor’. Mr McCourt performed basic labouring tasks under the supervision and direction of supervisors employed by one of Construct’s clients; Hanssen Pty Ltd. The relationship between Construct and Hanssen was governed by a Labour Hire Agreement. There was no contract between Mr McCourt and Hanssen.

After Mr McCourt’s work with Construct ended, he and the CFMMEU commenced proceedings against Construct seeking orders for compensation and penalties on the basis that Construct had not paid Mr McCourt according to his entitlement, as an employee of Construct, to payment in accordance with the relevant Modern Award.

Regardless of the fact that the contract said Mr McCourt was a ‘contractor’, it was held that the terms of the written contract established an employment relationship. That is, the actual rights and obligations established under the contract (predominantly the fact that Construct could ‘control’ practically every aspect of Mr McCourt’s work).

The second case: ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2

Between 1977 and 2017, two employees of ZG Lighting Pty Ltd (the employer’s company name as of 2015) were engaged as truck drivers. They were initially engaged as employees and drove the company’s trucks. However, this changed around 1985 when the employees accepted the company’s offer to become contractors and purchase their own trucks. The now contractors created partnerships with their wives to initiate the new agreement that involved:

• each partnership executing written contracts with the company for the provision of delivery services;
• purchasing their own trucks from the company;
• paying the maintenance and operational costs of those trucks;
• invoicing the company for its delivery services; and
• getting paid by the company for those services.

The contractors commenced proceedings in the Federal Court of Australia claiming they were owed entitlements on the basis that they were actually employees of the company. After the Full Court said that they were employees when considering the ‘substance and reality’ of the relationship, the High Court unanimously held that the respondents were not employees of the company largely for reasons consistent with the approach of the First Case discussed above.

Employers must review their contracts and practices to protect themselves

These High Court decisions clarify the approach to determining employment relationships and make it easier for employers to protect themselves against the liabilities arising out of independent contractors who later turn out to be employees based on their work practices. However, there was no suggestion in these cases that the contracts were a sham or that the written contracts were varied by conduct which could have resulted in different decisions regardless of the terms of contract.

Therefore, it is not only important for employers to carefully draft their future independent contractor agreements but also to review their current agreements to ensure they do not create liabilities for the employer and the employer is engaging the contractor in accordance to the terms of the agreement.

More information

For more information on an independent contractor agreement, or for general advice on how to best handle employees in these situations, please contact a member of our Employment and Workplace Relations team:

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Author

This Employment and Workplace Relations update was authored by Nadeem Hekmat, Associate.

Note: This update is a guide only and is not intended to constitute legal advice.